In our Pensions Crisis Coach series, we aim to help ease your retirement worries. Are you concerned you’re not saving enough for your later years? Do you want to know if you have enough to retire or don’t know how to find your lost pensions?
Email us at money@theipaper.com. We’ll seek to get you on the right track with help from some of the best financial experts and advisers in the business.
Holly writes: I am 25 years old and recently returned to the UK after living in Australia for two years. I have received a £30,000 inheritance and want to know what the smartest thing would be to do with the money – should I put some into a pension, invest it or put it towards a house deposit?
Alina Khan, The i Paper’s money coach reporter responds: After some back and forth on email, you told me you were worried that you had missed out on two years’ worth of pension contributions when living in Australia.
I first needed to ascertain whether you had any pension savings, to which you told me you contributed to a workplace pension for a few years before moving to Australia which currently has £3,648 in it.
You also recently started a new job since moving back to the UK but only have about one month’s contribution saved in to your pension.
Aside from the £30,000 inheritance you received, you also told me you have £1,200 sat in a high-interest savings account.
You live at home, earn £32,500 a year and would like to hopefully buy your first home in the next few years.
In terms of whether you should invest some of your inheritance into your pension to make up for the years you weren’t contributing, Connor Read, a financial planner at Finura, said you shouldn’t feel pressured to catch up on those contributions.
He said: “At 25, the biggest impact will come from consistently saving over the coming decades, rather than making up for a relatively short gap while you were living abroad.”
Read said you should always ensure your employer matches how much you are contributing, if that is an option.
“Any money you invest into your pension is going to be invested for at least the next 32 years, since you generally cannot access a pension until at least age 57.
“This grants a huge amount of time for the investments to grow, and if you have a year or two of investment losses, it is unlikely to impact you in the long term,” Read explained.
You also mentioned you want to start investing but, as you want to buy your first home, you will need to prioritise that. The first thing you need to do is work out how big of deposit you will need before making any decisions about investing.
Lenders will usually offer up to 4.5 times the amount your annual income – this is a benchmark for how much you can borrow on a mortgage.
“[This means] a £30,000 deposit on a property valued at £176,250 could be within reach, although there are many factors which could impact this, including whether you buy alone or with a partner. I’d suggest speaking with a mortgage broker to get a good idea of where you personally stand,” Read said.
If you think you need the full £30,000 to go towards a house deposit, then Read suggested not investing any of the money and keeping for a property.
But, he added, if you find you have extra money then a stocks and shares ISA is a good place to invest the funds.
“A rule of thumb to follow is to only invest money which you don’t need access to for at least five years – this gives the investment time to grow and/or recover before you need it and reduces the chance of you being forced to sell at a loss.”
Whilst maximising investment growth might be a priority for many, for the next two years, protecting your house deposit could well be worth keeping priority.
Read added: “Investments can grow faster than cash in any given year, but you could be unlucky and lose a chunk of your deposit over the next two years – for something so imminent and important, I would play it safe in this instance.”
He said a high-interest savings account would be a good place to hold your inheritance, particularly because you are a basic-rate taxpayer. This means the first £1,000 in interest you earn from your savings will be tax-free as it falls within your personal savings allowance.
You could perhaps put the money into a cash ISA where all the interest you will earn will be tax-free.
Currently, you can save £20,000 a year into a cash ISA, but from April 2027 this falls to £12,000.
Read also suggested looking into a lifetime ISA, which allows you to receive a 25 per cent government bonus on your savings up to £1,000 per tax year. However, the LISA has a property price cap of £450,000, so if the home you buy is worth more you will incur a 25 per cent withdrawal penalty on your savings.
It is also important to keep in mind you can only put in £20,000 a year across all ISA products per tax year.
You also mentioned you have already put £20,000 of your inheritance into premium bonds in the hope of winning a prize.
Read said premium bonds are best held by higher or additional-rate taxpayers who can hold the full £50,000 allowed as this grants the highest chance to win a tax-free payment.
“Premium bonds are not necessarily a bad choice, but most of the time I would opt for a guaranteed interest rate over the ‘chance’ of winning with premium bonds, especially since probability means most people will not receive even close to the headline prize rate (and maybe nothing at all).”
If you do decide to put your inheritance into a high-interest savings account, it is worth having a think about whether you should put the money into a fixed or easy-access account.
If in a fixed account, you are locking that money away for a set period of time where it will often benefit from better interest rates. Meanwhile, easy-access accounts might offer lower returns but will allow you to withdraw from the account.
Read said: “I would definitely suggest keeping at least some cash in an easy-access account to act as an emergency fund. You never know when you might need to suddenly dip into savings with little or no warning.
“Once you have enough saved for your house deposit, whether that’s now or in the future, you can turn your focus to investing into an ISA (for money needed before 57) and/or contributing more into your pension (for your retirement).”